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Refinement of the hedging ratio using copula-GARCH models

Author

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  • Waël Louhichi

    (Essca School of Management)

  • Hassen Rais

    (Essca School of Management)

Abstract

The goal of this paper is to improve the effectiveness of hedge overlays via futures against certain investment risks. Accordingly, we propose a dynamic generalized autoregressive conditional heteroscedasticity (GARCH) model based on different copulas in order to specify the joint distribution between spot and futures returns. We test our model for several types of asset indices: S&P 500 for stocks, Brent for energy, Wheat for commodities, Gold for precious metals and Euro/Dollar for exchange rate market. The empirical results show that copula-GARCH models outperform the conventional model and improve the effectiveness of the hedging ratio. Our approach is useful for investors and risk managers, when determining their hedging strategy.

Suggested Citation

  • Waël Louhichi & Hassen Rais, 2019. "Refinement of the hedging ratio using copula-GARCH models," Journal of Asset Management, Palgrave Macmillan, vol. 20(5), pages 403-411, September.
    • Handle: RePEc:pal:assmgt:v:20:y:2019:i:5:d:10.1057_s41260-019-00133-5
    DOI: 10.1057/s41260-019-00133-5
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    References listed on IDEAS

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    2. Héctor Alonso Olivares Aguayo, 2021. "Portafolios mexicanos tradicionales y no tradicionales," Revista de Investigación en Ciencias Contables y Administrativas, Universidad Michoacana de San Nicolás de Hidalgo, Facultad de Contaduría y Ciencias Administrativas, vol. 6(2), pages 3-25, July.

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    Keywords

    Hedging ratio; Copula; GARCH;
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